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Financial Services Law Insights and Observations

CFPB UDAAP Action Targets Payday Lender's Collection Activities

CFPB Payday Lending FDCPA UDAAP Debt Collection Enforcement

Consumer Finance

This afternoon, the CFPB announced that a nonbank consumer lender will pay $10 million to resolve allegations that it engaged in certain unfair, deceptive, and abusive practices in the collection of payday loans. This action comes exactly one year after the CFPB issued guidance that it would hold supervised creditors accountable for engaging in acts or practices the CFPB considers to be unfair, deceptive, and/or abusive when collecting their own debts, in much the same way third-party debt collectors are held accountable for violations of the FDCPA.

Based on its findings during an examination of the lender, which was coordinated with the Texas Office of Consumer Credit, the CFPB alleged that the lender and its third-party vendors used false claims and threats to coerce delinquent payday loan borrowers into taking out an additional payday loan to cover their debt. The CFPB claimed that the lender trained its staff to “create a sense of urgency” for consumers in default, and that in-house and third-party vendor staff did so by (i) making an excessive number of calls to borrowers; (ii) disclosing the existence of the debt to non-liable third parties; and (iii) continuing to call borrowers at their workplaces after being told such calls were prohibited, or calling borrowers directly after they had obtained counsel.

The CFPB further alleged that some in-house staff also misrepresented the actions that third-party collectors would take after a loan was transferred for additional collection efforts, even though those actions were prohibited or limited by the lender’s own corporate policies and contracts with outside collectors.  The in-house staff also allegedly falsely advised borrowers that they could not prevent the transfer of the delinquent debt to a third-party collector. In-house and third-party staff also allegedly falsely threatened delinquent borrowers with litigation or criminal prosecution, when the lender did not, as a matter of policy, pursue litigation or criminal prosecution for non-payment or permit its third-party collectors to do so.

The CFPB characterized certain of the acts as either unfair or deceptive, and stated that the lender’s efforts to create and leverage an artificial sense of urgency to induce delinquent borrowers with demonstrated inability to repay their existing loans to take out new loans with accompanying fees “took unreasonable advantage of the inability of consumers to protect their own interests in selecting or using a consumer financial product or service” and thereby qualify as abusive acts or practices.

The lender, in its own press release, pointed out that the CFPB’s allegations related only to collection practices prior to March 2012, and that a third-party review revealed that more than 96 percent of the lender’s calls during the review period met relevant collections standards. The lender added that it has policies that prevent delinquent borrowers from taking out new loans, and that an analysis of those policies revealed that 99.5 percent of customers with a loan in collections for more than 90 days did not take out a new loan with the lender within two days of paying off their existing loan, and 99.1 percent of customers did not take out a new loan within 14 days of paying off their existing loan. This data suggests that the CFPB’s exception tolerance for in-house collection operations is exceedingly thin.

The order requires the lender to pay $5 million in redress to eligible borrowers and a $5 million civil money penalty.  The lender stressed that it cooperated fully with the CFPB, implementing recommended compliance changes and enhancements and responding to requests for documents and information. It committed to completing those corrective actions and agreed to certain reporting and recordkeeping requirements.

The action is at least the second public action taken by the CFPB against a payday lender. In November 2013 the CFPB entered a consent order to resolve so-called “robosigning” allegations against another lender. That action, which was resolved with a $5 million penalty and $14 million in restitution, also included allegations that the lender violated the Military Lending Act and engaged in certain unlawful examination conduct.